THE HIDDEN COST OF LOW CUSTOMER RETENTION

In my previous life as a tax attorney, I had many discussions with CEOs about their financials. In almost all cases, they were intimately familiar with all the numbers that mattered: gross sales revenue, cash flow, net income, profit and loss, etc.

All the numbers, that is, except for one: customer retention rate. Whenever I asked about this number, I NEVER received a direct response. Instead, I heard a lot of imprecise opinion and confusion: “We are about average.” “We are better than average.” “We do not track that.” “I would need to speak to the COO to get those numbers.”

Unfortunately, and because customer retention does not appear on the financials, most business leaders operate under the same three flawed assumptions:

1. Our turnover rate is average.
2. Turnover is the cost of doing business.
3. There is nothing we can do to change it anyway.

That’s a problem. At least as long ago as 1990, when Harvard Business Review published its now classic article, “Zero Defects Comes to Service,” it’s been well established that when customer retention rates increase by 5%, profits will increase by 25% to 95% within just two-three years. There is no other revenue growth strategy that is this simple, clear, heavily researched, and ALWAYS works!

And yes, it is possible to have a 95% customer retention rate. Some companies are even higher (USAA has a 97% retention rate). But as soon as that number drops below that baseline, companies automatically incur over 12 unnecessary additional costs.

Here are three that are most often overlooked…

1. THE MOST TALENTED EMPLOYEES LEAVE FIRST

Customer and employee retention rates are interconnected. When a customer leaves and ends the relationship with an employee, it decreases that employee’s satisfaction and engagement. The more customers that leave, the more these “negative endings” affect employee retention.

And it’s the most talented and confident employees who walk first. They know they have other options, including finding a job with a company that values its customers and employees. Those employees who stay with you under these circumstances are your least talented and least productive.

For example, one of my clients had an overall 87% customer retention rate. Better than the average in their industry, but after working together for nine months, we were able to increase that to 94% for its top customers, and from 86% to 91% for the rest of the customers. By retaining its most talented employees, the company increased its top customers’ retention rates to 94%. These same top customers ended up spending 365% more and gave 2.3 times as many referrals as they did during the previous year, generating 13 times their investment.

2. TOO MUCH TIME IS SPENT SERVICING NEW CUSTOMERS

The more customers that leave, the bigger the hole that needs to be backfilled with new customers. And new customers take up most of the employees’ time.Being new to the organization, they are not yet familiar with its products, services, policies, billing, etc. Understandably, they have a lot of questions.

Now, instead of spending time nurturing and developing stronger relationships with current top customers to increase their loyalty, uncover any issues, and win their cross-sales, employees are disproportionately focused on getting the new customers up to speed.

That’s another missed opportunity since spending time with existing customers goes directly to the bottom line.

When one of my clients handpicked 44 representatives to work exclusively with its top customers, the financial and human payoffs happened almost immediately. Not only were the representatives happier and more motivated, but also the customers were delighted to receive a proactive call and to be asked if they had any issues, concerns, or questions. As a result, they bought additional services and gave more referrals. The organization saw its ROI increase by 849% in just three months.

3. IT IS DIFFICULT TO TRAIN EXITING EMPLOYEES ON MORE ADVANCED SKILLS

As more and more employees leave (see #1 above), the training of new employees eats into the time and resources needed to train existing employees on more advanced skills. Additionally, many new employees creates more customer interaction with these less-skilled folks, further exacerbating customer dissatisfaction.

Under these circumstances, Human Resources reaches capacity just hiring and training new people, leaving little time to offer more advanced skill training. Thus, 85% of new managers have had zero formal management training before becoming a manager. In the medical field, that would be analogous to having a doctor perform surgery without medical training!

With Millennials and Gen Zs becoming a larger proportion of the workforce, good managers are required. These younger generations expect a customized developmental plan and mentoring by skilled leaders. If the organization is too busy dealing with turnover and the training of new people to offer this, your new employees will leave for greener pastures.

FINAL THOUGHTS

Customer retention is intimately connected to employee retention. It is rare to have one without the other. They work in tandem, in either a positive or negative direction.

Companies that recognize this tight relationship, and that track and work to improve these numbers, will see higher satisfaction and profits in both the short and long term.

A former tax attorney at Arthur Andersen, Lynn Thomas brings the same rigor to her work now as an employee and client retention consultant. With more than 30 years’ experience, she uncovers why clients/employees come, stay, leave, refer, and cross-buy. Her unique, fully customized approach includes measurable and actionable steps toward cultivating a powerful, profitable, and relationship-centric company. Learn more about Lynn and Thomas Consulting, here.